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Expectations for Chinese Bond Markets in 2015

Chinese Bond Markets

LUDAN LIU: The Chinese economy has been softening and the central bank has been on the doveish side. This has been driving the bond market's huge rally as of last year. The China Bond Composite Index rallied over 11% last year. Yield compression has topped 100basis points due to the slowing economy and softening monetary policy. The cut in interest rates last November and the recent reserve requirement ratio cut demonstrate that the trend will continue. We think bonds this year will also deliver a very nice return.

Even though bonds rallied last year, yields are still at a very attractive level. The 10-year Treasury is at 3.3%. Ten-year policy bank paper is trading at 3.8%. That compares favorably to U.S. Treasury bonds and European, and Japanese government bonds. The attractiveness of this yield level is something we think global investors should consider. What the world has been missing from the rally last year was the participation of foreign investors. The reason is the Chinese renminbi is not fully convertible yet and therefore the Chinese bond market has not been fully integrated into global capital markets. However, with the new initiative of having the renminbi eventually liberalized and made fully convertible, we do expect the Chinese bond market to become integrated into global capital markets sooner or later. When that happens, we expect a huge amount of interest from foreign investors in on-shore Chinese bond markets.

2015 Expectations

LIU: I think as the economy slows down the credit spread will naturally widen a bit, however, the slowdown is not terribly concerning.. We're still going to garner GDP around 7%; the widening should be fairly moderate. At the same time, we do expect the central bank to keep easing, which will be positive for interest rates. Products such as treasuries will also do well.

The supply-demand dynamic is very favorable right now. The Chinese population is aging and is increasing its pension plan allocations to bonds. The supply of bonds is moderate, which is favorable for supporting the bond market on a technical level.

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Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. Principal risks of investing in China include, but are not limited to, political and economic instability, inflation, confiscatory taxation, nationalization and expropriation, market volatility, illiquidity, currency fluctuation and devaluation, actions taken by the Chinese government in the markets, less reliable financial information, differences in accounting, auditing, and financial standards and requirements from those applicable to U.S. issuers, and uncertainty of implementation of existing Chinese law.

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